Workers Compensation is where our Insurance Agency Shines
Restaurants are an industry that has unique exposures. Fortunately at Cothran Insurance restaurants are something that we specialize in.
Whether you own the building or rent with a triple net lease with your landlord, you are required to insure the building. With regards to building coverage, restaurants are in a unique position where they have the ability to insure their restaurant equipment as building which allows them to get a much lower rate on their insurance. Their walk-in freezers, refrigerators, ventilating, cooking and dishwashing equipment can all be included within their building limit instead of being insured as business personal property. For instance, if their building were estimated to have a replacement cost value of $800,000 and they had $150,000 in restaurant equipment, they would want to insure their building for $950,000. Employing this technique is just one way our agency can help you save money.
Regardless of whether you own the building or you rent, all restaurants have a business personal property exposure. The way I describe business personal property to my customers is to think of it in terms of if you were to cut the roof off of the building and tip the building over, all of the items that would fall out would be considered business personal property. This could include your tables, chairs etc. However, for those that rent we would also want to include any tenants improvements and betterments which are the fixtures and alterations that have been made to your premises during the remodeling of your unit to make the restaurant look and feel the way you want it to. Examples of these include but are not limited to light fixtures, the flooring or erecting or demolishing of walls. The cost you incurred during the remodel of your unit you would want to insure as business personal property if you were a tenant. One other important consideration for those that rent is that even though you are not insuring the building, we always ask our customers how much of their business personal property is actually restaurant equipment because some of our carriers allow us to insure the restaurant equipment as building coverage providing a much lower premium for our customer.
Restaurants have a significant potential for General Liability claims. The most common types of claims that I’ve seen are customer slip and falls, food poisoning and a broken tooth from biting down on a foreign object. Slip and falls in particular have the potential to be catastrophic. Wet floors from either recently mopped areas or spilled liquids or food are the most common causes of slip and falls. I’ve seen awards 2 injured customers and access of hundreds of thousands of dollars do to either back injuries or head injuries as a result of slip and falls. Therefore it is imperative to have adequate limits on your general liability of no less than $1,000,000 per occurrence. In some states, restaurants can lessen or eliminate their liability from these wet floor exposures by properly placing wet floor signs around the area while waiting for it to dry.
COVERAGES TO CONSIDER
Loss of Income
This coverage should be mandatory, but unfortunately, it isn’t automatically included on some carriers’ policies for restaurants. In the event of covered damage to your restaurant, if you aren’t able to operate during the repairs, this coverage will pay for the net income as well as continuing operating expenses such as your mortgage, electricity, water bill, etc. during the time the repairs are being made. For example, for easy math let’s assume that your restaurant averages $10,000 per month in net income (Gross Receipts minus All Expenses, but before Income Taxes) and your continuing operating expenses during the repairs averaged $5,000 per month. If there was fire damage to your restaurant and you had to close the restaurant while the repairs are being completed for 3 months, this coverage would pay your restaurant $45,000.
This particular coverage is vital to a restaurant because if your restaurant were to shut down for a few months while repairs are being made, you wouldn’t want to lose all of your staff to a competitor and then have to rehire and retrain all new staff once you get back up and running. Having Ordinary Payroll on your policy allows the insurance company to pay for your Ordinary Payroll for however many days you’ve selected, typically 30, 60 or 90 days, to all of your employees except Officers, Executives, Department Managers and Employees under contract. This includes Payroll, Employee benefits if directly paid through payroll, FICA payments you pay, Union Dues you pay and Workers Compensation premiums.
Extended Business Income
Once your restaurant is back up and running after repairs are made to a covered claim, it may take a while for your sales to get back to pre-loss levels. Having Extended Business Income on your policy allows the insurance company to pay you the difference between your actual income after operations have resumed and what your income would have reasonably been if the damage to your restaurant had not occurred. Typical time periods chosen for this coverage are 30, 60, 90 and 180 days.
If restaurants sell alcohol, they also have a liquor liability exposure. Liquor liability provides coverage for the restaurant in the event that someone becomes injured as a result of an intoxicated person who was served alcohol at your establishment. An example of this would be if a customer of the restaurant were to become intoxicated, get in their vehicle and get into a car accident on the way home, the person or persons they injure in the car accident may come back and sue the restaurant for bodily injury and property damage for over serving the customer.
Spoilage From Power Outage
What is a restaurant without its food? If you were to lose power, you run the risk of your food and other perishables spoiling. The appropriate way to protect yourself from this type of claim is to make sure you have a Spoilage From Power Outage limit equivalent to the value of your perishable items when you have just restocked. Some restaurants may only need a $5,000 limit, some may need a $25,000 limit and some may even need higher limits depending on what they keep on hand.
Unfortunately, I’ve seen some agents mistakenly try and insure your perishable items such as food and alcohol on a form called Utility Services – Direct Damage. While that may be a cheaper option and provide coverage in certain scenarios, it doesn’t adequately insure a restaurant’s perishables like Spoilage From Power Outage and could result in a claim being denied if insured under that form.
Workers compensation is a particular policy that our agency specializes in and is very familiar with all the rules associated with it. All states have rules regarding who is and who is not required to carry workers compensation. For the most part, the vast majority of states require that if you have 3 or more employees then you are required to carry workers compensation. At the beginning of the policy period, your payroll associated for the upcoming 12 months is estimated. Then at the end of the policy period the insurance carrier will audit your records to verify your payroll. If the amount of payroll originally estimated was more than your actual payroll then you will receive a refund. However, if your payroll was initially underestimated, you will end up owing money after the policy is audited. Restaurants and their audited payrolls are unique in that tips are generally not included when auditing payrolls. Also, overtime should not be charged at the full overtime rate and instead should only be charged for the normal hourly rate. We help a lot of our customers reduce their premiums by getting their audits adjusted at the end of the policy term to account for these corrections that are sometimes overlooked.
Non Owned Auto
Non-owned auto is a coverage that provides excess liability over their employee’s vehicles. For instance, if an employee were to run to the bank to make a deposit for the restaurant in their own vehicle and get into an auto accident, whoever they hit may come back and sue the restaurant because the employee was running errands for the restaurant at the time of the accident. Another example would be if a restaurant provides delivery services and requires that the employees use their own personal vehicles for the deliveries. This is a much greater exposure than if the restaurant was not providing delivery services and therefore insurance carriers typically will require a standalone non-owned auto liability policy, instead of just adding it onto the Business Auto or Businessowners policy, if the annual gross receipts derived from delivery are more than 5 to 10% of the restaurant’s annual total gross receipts.
With all of the freezers, refrigerators, stoves, cash registers, phone equipment and other electrical equipment, equipment breakdown is an absolute necessity for any restaurant. This all important coverage covers your equipment for things like mechanical breakdown, artificially generated electrical currents and electrical arcing that damages your equipment. For example, suppose that bearings burned out on your exhaust fan, or an artificially generated electrical current damages your walk in freezer. Not only will these be costly repairs but you could potentially lose income as a result of the damage. That’s where Equipment Breakdown comes into play. This is one coverage that we include on every policy for our Restaurants.
Some but not all policies automatically provide coverage for exterior signs. Since some exterior signs can cost upwards of $25,000, it’s important to note the sublimits provided on your policy for signs and also to be aware if they differentiate between signs attached to the building or detached signs that might be out by the street.
Utility Services – Time Element
Who hasn’t lost power before? Whether it’s a bad snow storm or high winds that is the proximate cause, losing power for a week or more can be devastating to your business because you can’t operate, and if you can’t operate you can’t generate income. Utility Services – Time Element (not to be confused with Utility Services – Direct Damage), pays for your loss of income as a result of loss of power, water or communication lines such as your telephone lines, resulting from the failure of utility property. It’s also important to note that unless the policy is endorsed to include Overhead Transmission lines then you aren’t getting the protection you need from this coverage.
Food Contamination Loss of Income
Being in the food industry, I’m sure you have heard of Taco Bell’s E coli outbreak from 2006 where 71 people were infected from the lettuce they were serving or most recently Chipotle’s E coli outbreak in 2015 and 2016 where 60 people were infected. In both of those cases all locations involved as well as unaffected locations of the same franchise had serious negative impacts to their gross sales as customers were reluctant to eat there during the outbreaks. While the general liability policy would pay for any lawsuits that resulted from food poisoning, Food Contamination Loss of Income is a coverage that they would have needed in order to cover their lost income during the time it took for the whole story to blow over. Food contamination loss of income can not only pay for lost income as a result of an alleged or actual food contamination, but can also pay for additional advertising expenses, expenses related to clean up as well as inoculation expenses of the customers.
No one ever wants to think about their employees stealing from them but the reality is that it happens every day. Even the most trusted long term employees may eventually be faced with a personal problem that they feel their only way out of is by embezzling money from their employer. Every restaurant should have at least $10,000 coverage for employee dishonesty for just such an occurrence.
Ordinance or Law
In every locality, there are ordinances and laws regulating the construction of buildings. These change throughout time. So while your building met code when it was originally built, if damage occurs that requires repair and you can’t get a certificate of occupancy until you meet current codes, that cost is on you unless you have this all important coverage. The insurance company’s obligation to you, assuming you have Replacement Cost on your structures, is to pay what it would cost to repair or rebuild the building with like kind and quality materials as it stands now. Any increased cost to meet code or changes that must be made to comply with current code is on you without this coverage.
Ordinance or Law on commercial policies is broken into three parts: Undamaged Portion of the Building, Demolition Costs and Increased Cost of Construction. Below I’ll define the coverages and afterwards provide an example to illustrate how each coverage would apply.
Coverage A – Undamaged Portion of the Building – after direct damage by a covered peril to an insured building, if as a result of compliance with or enforcement of a local ordinance or law that is in force at that time, you are required to demolish undamaged parts of the same building that sustained damage (i.e. 60% of a building sustains fire damage, this coverage is speaking about the 40% that didn’t sustain fire damage) this coverage pays for the loss in value of that undamaged portion of the building.
Coverage B – Demolition Costs – after direct damage by a covered peril to an insured building, if as a result of compliance with or enforcement of a local ordinance or law that is in force at that time, you are required to demolish undamaged parts of the same building that sustained damage, this coverage pays the cost to demolish and clear the site of undamaged parts of the same building.
Coverage C – Increased Cost of Construction – after direct damage by a covered peril to an insured building, if as a result of compliance with or enforcement of a local ordinance or law that is in force at that time, you incur increased costs in construction to comply with those ordinances or laws, this coverage pays those increased costs to repair or reconstruct the damaged portion of the building and/or reconstruct or remodel the undamaged portions of the same building whether or not demolition is required to meet the minimum requirements.
Example of how these three coverages would apply
There is a building that was built in 1950 insured for $1,000,000 on a Replacement Cost basis that sustains fire damage to the building destroying 60% of the building. The insurance company’s obligation to the insured is to repair or rebuild the building with like kind and quality materials as it was prior to the fire without any deduction for depreciation. Since the building was built in 1950, the local ordinances and laws regulating construction have changed significantly requiring that during the rebuilding of the building that they make upgrades to the electrical, heating, ventilating, air-conditioning and plumbing. The local ordinance also says that if a building has been damaged to 50% or more that the undamaged portion of the building must be demolished and rebuilt in accordance with the current building codes rather than simply updating the undamaged portion as well.
The structure’s limit of $1,000,000 would pay the cost to rebuild or repair the 60% of the building that was destroyed in the fire but would only pay what it would cost to rebuild or repair it with like kind and quality of how the building was constructed prior to the fire. The upgrades to the electrical, heating, ventilating, air-conditioning and plumbing to meet current code would not be covered under the structure coverage alone.
Since a local ordinance requires that any structure damaged more than 50% must be demolished and rebuilt to current code.
Coverage A – Undamaged Portion of the Building would pay for the reconstruction costs of the undamaged portion of the building but again only for how it was constructed prior to the fire and not cover the cost of the upgrades to the electrical, heating, ventilating, air-conditioning and plumbing.
Coverage B – Demolition Costs would pay the cost to demolish and clear the site of the undamaged portion of the building that is required to be demolished due to the local ordinance requiring that any building destroyed more than 50% be demolished and rebuilt.
Coverage C – Increased Cost of Construction would pay the additional cost necessary to make the upgrades to the electrical, heating, ventilating, air-conditioning and plumbing to the damaged and undamaged portion of the building.
Increased cost of construction isn’t just limited to electrical, heating, ventilating, air-conditioning and plumbing. Local ordinances and laws are ever changing and address many issues of construction such as the building’s foundation. It is not only important to be aware of how compliant your building is with current codes but also making certain you have adequate limits for Ordinance or Law in the event that damage does occur. Also, remember that this coverage doesn’t have to just pertain to the main structure. You can have an Ordinance or Law issue with any structure such as docks, swimming pools or any other structure located on your premises.
There are many ways to provide a limit for the above three parts to Ordinance or Law.
The carrier may provide a blanket limit available for any one loss regardless of which part of Ordinance or Law needs to be used. So they could say we will provide a $100,000 combined limit available for Undamaged Portion of the Building, Demolition Costs and Increased Cost of Construction.
They could offer a separate limit for Undamaged Portion of the Building and a combined limit for Demolition Costs and Increased Costs of Construction. For example, they may say we will provide Undamaged Portion of the Building coverage equal to whatever the respective building limits are per building (so if Building 1 is insured for $500,000 it will have $500,000 coverage for Undamaged Portion of the Building, and if Building 2 is insured for $750,000 it will have $750,000 for Undamaged Portion of the Building) and then provide a blanket limit of $100,000 for Demolition Costs and Increased Cost of Construction.
Another option is to provide separate limits for all three coverages meaning they may provide $250,000 for Undamaged Portion of the Building per building, $50,000 for Demolition Costs per building and $50,000 for Increased Cost of Construction per building.
Lastly, I’ve even seen it where instead of providing a per building limit for these coverages, they instead opt for providing a per loss limit such as $100,000 limit per loss combined available limit for all three parts. So instead of having $100,000 available per building, they instead are only providing a $100,000 limit per loss so regardless of how many buildings are damaged, it could be 1, 5 or 10 buildings damaged, only $100,000 is available for combined all three parts of Ordinance or Law.
Earthquake provides property coverage due to loss by earthquake. This is typically excluded from all Property policies and must be purchased by endorsement.
If a restaurant owns a vehicle for the purpose of delivering food, catering or possibly just for maintaining the premises and running errands then they should have a business auto policy. It is imperative that if a vehicle is being used for business purposes, then it is not insured on a personal auto policy as a personal auto policy would not provide any coverage whatsoever for any claims arising for business purposes. We always advise our customers that have a business auto policy have no less than $1,000,000 liability due to the litigious environment that we live in. Unfortunately, if an accident occurs, any savvy attorney that gets ahold of the lawsuit we’ll see that the vehicle was being used for business purposes and will sue the business for as much is they think they can Get away with. There are many coverages available on a business auto policy such as comprehensive and collision to provide physical damage coverage for your vehicle if it were involved in an auto accident, medical expense to pay for medical bills of anyone in your vehicle at the time of the accident regardless of who is at fault for the accident, rental reimbursement, towing in labor as well as many other coverages. Whenever we write a business auto policy for our customers, we do a thorough review of all available coverage is to make sure that we tailor the policy to meet your specific needs and wants.
- A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is the policyholder’s property) from: –Overflow of inland or tidal waters; or –Unusual and rapid accumulation or runoff of surface waters from any source; or –Mudflow;or
- Collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.
Personal Property of Others
If you do coat checks or take in other property of your customers, this coverage will pay for the benefit of your customer, damage to property of others in your care, custody or control for which you are legally liable for. Sometimes only a small amount of coverage such as $2,500 is afforded so if you need higher limits then this can be increased or a broader form be written called Bailees Customer Floater.
Valet Parking Coverage
If your restaurant provides valet services for your customers and parks their cars for them, then you need to make sure that you have coverage for damage to their vehicles in case it is damaged during the course of providing this service. Adding Valet Parking coverage would be imperative because without it, you would have no coverage if one of your employees were to wreck a vehicle while parking it.
Forgery and Alterations
Forgery and Alteration provides coverage in the event that an outgoing check, draft, promissory note, bill of exchange or similar written promise of payment issued by you was forged or altered which resulted in a loss of money to you.
Accounts Receivables pays to reestablish records, pays uncollectable amounts due from your unit owners, interest charges and collection expenses if records of monies owed to the Association are damaged by a covered loss.
Water Backup will pay up to the limit of liability chosen (typically $5,000 to $25,000) for direct damage to covered property caused by or resulting from water which: 1. backs up through sewers or drains from outside the dwelling’s plumbing system; or 2. overflows from a sump pump, sump pump well or other system designed to remove subsurface water from the foundation area. This does not provide coverage for water entering in through the foundation. That is not covered by a standard policy and usually would require that you have flood insurance. However, water entering in through the foundation isn’t automatically covered by flood insurance either as it would have to meet the definition of flood first for it to be considered. Also, a pipe bursting in the walls isn’t covered by this endorsement as that is covered under the standard property policy and would be subject to the dwelling’s limit of insurance instead of the sub-limit stated for Water Backup. So if you have a building insured for $500,000 and a pipe were to burst in the ceiling causing damage to the structure, your limit of insurance would be $500,000 provided under the standard policy and not subject to the Water Backup sub-limit which is typically $5,000, $10,000 or $25,000.
Some Restaurants may be written on a policy that has a coinsurance provision requiring them to insure the buildings to a minimum of whichever coinsurance percentage is chosen compared to the actual reconstruction cost of the building and if they don’t insure the building adequately, then there are penalties involved in partial claims. When chosen, Agreed Value waives that coinsurance requirement for partial losses and a predetermined amount will be paid in the event of a total loss to the described property. How this coinsurance penalty applies on partial losses is as follows. Let’s say that the Restaurant has a $5,000 deductible, the damaged building was insured for $600,000 with a 90% coinsurance provision but after the loss it was determined that the actual reconstruction cost of the building was $1,000,000. According to the coinsurance provision, they were required to insure the building for a minimum of 90% of the reconstruction cost or $1,000,000 times 90% which is $900,000. However, they only insured it for $600,000 which means that they were 1/3 deficient on their contractual insurance requirements. 1 minus ($600,000/$900,000) = 1/3. So for every partial claim that comes in, they will not only have to pay their deductible but also 1/3 of the total claim. Let’s say the total claim was $100,000. The Restaurant would have to pay $33,333 plus their $5,000 deductible for a total of $38,333. If they had Agreed Value on the policy they would have to only pay out the $5,000 deductible. The alternative and preferred method of course being that the building is insured adequately to $1,000,000 to begin with.
Appurtenant Structures are buildings or other structures that are other than the main building. For example, a shed, retaining wall or swimming pool could be an appurtenant structure. Typically, but not always, 10% of the building limit up to a $50,000 maximum, if written on a “Businessowners” policy, is provided for Appurtenant Structures. So if a building is insured for $750,000 it would also have $50,000 for structures appurtenant to it. If a building were insured for $300,000 it would only have $30,000 for structures appurtenant to it. Each carrier may have a slight variation of what limit they provide for appurtenant structures. And if they didn’t write the policy on a Businessowners policy, but instead wrote it on a standard package, there may be no coverage for appurtenant structures. One issue that needs to be mentioned is that if it would cost more than $50,000 to replace the appurtenant structure then it wouldn’t be covered under this and would have to be scheduled on the policy. So even if you would be satisfied with $50,000 for the structure, if the replacement cost of the structure exceeds $50,000, you should schedule it on the policy otherwise there is not coverage. For instance, let’s assume you have a swimming pool that would cost $70,000 to reconstruct and it is appurtenant to a $1,000,000 building that would provide $50,000 coverage in appurtenant structures coverage. If the swimming pool were damaged, since it costs more than $50,000 to reconstruct, it technically does not have any coverage. That swimming pool would have to be listed on the policy to provide coverage for it since its reconstruction cost is greater than $50,000
If your restaurant is part of a franchise, in the event of a covered claim to the premises, this endorsement will pay the costs to upgrade your building, permanently installed machinery and equipment, detached signs and Business Personal Property to comply with the most current specifications of the Franchise Agreement.
Restaurants have a significant Cyber Liability exposure due to all of the credit card transactions they process daily. A Cyber Liability policy provides coverage if a third party suffers Privacy Injury or Identity Theft or if the restaurant’s network sustained a security breach or electronic infection (transmission of a computer virus to the Network) that causes a third party to suffer Privacy Injury or Identity Theft. Privacy Injury or Identify Theft means any unauthorized disclosure of, inability to access, or inaccuracy with respect to, Non-public Personal Information. Non-public Personal Information means personal information not available to the general public from which an individual may be identified, including without limitation, an individual’s name, address, telephone number, social security number, account relationships, account numbers, account balances, and account histories. The policy can provide notification expenses to those affected, credit monitoring expenses and computer forensics expenses as well as a number of other benefits.
Employee Benefits Liability
Employee Benefits Liability – provides coverage for damages an employee may suffer due to any administrative act, error or omission of the employer to provide or notify the employee of the benefits they are entitled to (Fiduciary liability with an employee benefits liability endorsement is preferable): according to the ERISA act of 1974, the employee may sue individuals responsible for the act, error or omission personally and not just the company.
Employment Practices Liability
Employment Related Practices Liability – provides coverage for defense costs and legal liability for allegations of sexual harrasment, wrongful termination, discrimination and defense for violation of wage and hour laws.
Fiduciary Liability – provides persons working within business organizations that design, adminster, and manage pension (i.e. 401 (k)) and employee benefits plans (i.e. group health) liability in the event they are personally sued within the rights of the employee afforded by the ERISA act of 1974 for any act, error or omission within their discretionary functions as a fiduciary (if endorsed for employee benefits liability it will respond to administrative acts, errors or omissions as well) (this coverage is preferrable over employee benefits liability as all employee pension and employee benefit plans have associated fiduciary liability exposures).